Is Meeting the Consensus Eps Good News or Bad News? Stock Splits and the Accuracy of Analysts' Forecast Data

21 Pages Posted: 19 Mar 2002

See all articles by William R. Baber

William R. Baber

Georgetown University - Department of Accounting and Business Law

Sok-Hyon Kang

George Washington University - School of Business

Date Written: March 2002

Abstract

Both academic and practicing accountants use forecasts made by security analysts to estimate market expectations about forthcoming earnings announcements. We report empirical analysis to illustrate how common stock splits induce a loss of precision in computing forecast errors from commonly used analyst forecast data files. An investigation of security price reactions to earnings announcements demonstrates how the loss of precision potentially alters inferences about security price reactions to announcements of earnings that meet, but do not exceed, the consensus forecast. Further analysis indicates that, because stock-split adjustments are made retrospectively, and because firms that execute stock-splits tend to be well-performing ex post, the consequences of the stock-split problem are systematic, potentially contaminating empirical investigations of both time-series and cross-sectional characteristics of forecast errors and of security price reactions to earnings announcements.

Keywords: Stock splits, earnings per share, analyst forecasts

JEL Classification: G12, G14, G29, M41

Suggested Citation

Baber, William R. and Kang, Sok-Hyon, Is Meeting the Consensus Eps Good News or Bad News? Stock Splits and the Accuracy of Analysts' Forecast Data (March 2002). Available at SSRN: https://ssrn.com/abstract=303579 or http://dx.doi.org/10.2139/ssrn.303579

William R. Baber (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Sok-Hyon Kang

George Washington University - School of Business ( email )

405 Government Hall
GWU
Washington, DC 20052
United States
(202) 994-6058 (Phone)
(202) 994-5164 (Fax)

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